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DEPARTMENT OF TREASURY Office of the Comptroller of the Currency 12 CFR Parts 6 Docket ID OCC-2013-0008 RIN 1557-AD69 FEDERAL RESERVE SYSTEM 12 CFR Parts 208 and 217 Regulation H and Q Docket No. R-1460 RIN 7100-AD 99 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 324 RIN 3064-AE01 Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for Certain Bank Holding Companies and their Subsidiary Insured Depository Institutions. AGENCIES: Office of the Comptroller of the Currency, Treasury; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation. ACTION: Final rule. SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) are adopting a final rule that strengthens the agencies’ supplementary

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DEPARTMENT OF TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 6

Docket ID OCC-2013-0008

RIN 1557-AD69 FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 217

Regulation H and Q

Docket No. R-1460

RIN 7100-AD 99 FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 324

RIN 3064-AE01 Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio

Standards for Certain Bank Holding Companies and their Subsidiary Insured Depository

Institutions.

AGENCIES: Office of the Comptroller of the Currency, Treasury; the Board of Governors of

the Federal Reserve System; and the Federal Deposit Insurance Corporation.

ACTION: Final rule.

SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board of Governors of

the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC)

(collectively, the agencies) are adopting a final rule that strengthens the agencies’ supplementary

2

leverage ratio standards for large, interconnected U.S. banking organizations (the final rule).

The final rule applies to any U.S. top-tier bank holding company (BHC) with more than $700

billion in total consolidated assets or more than $10 trillion in assets under custody (covered

BHC) and any insured depository institution (IDI) subsidiary of these BHCs (together, covered

organizations). In the revised regulatory capital rule adopted by the agencies in July 2013 (2013

revised capital rule), the agencies established a minimum supplementary leverage ratio of

3 percent, consistent with the minimum leverage ratio adopted by the Basel Committee on

Banking Supervision (BCBS), for banking organizations subject to the agencies’ advanced

approaches risk-based capital rules. The final rule establishes enhanced supplementary leverage

ratio standards for covered BHCs and their subsidiary IDIs. Under the final rule, an IDI that is a

subsidiary of a covered BHC must maintain a supplementary leverage ratio of at least 6 percent

to be well capitalized under the agencies’ prompt corrective action (PCA) framework. The

Board also is adopting in the final rule a supplementary leverage ratio buffer (leverage buffer)

for covered BHCs of 2 percent above the minimum supplementary leverage ratio requirement of

3 percent. The leverage buffer functions like the capital conservation buffer for the risk-based

capital ratios in the 2013 revised capital rule. A covered BHC that maintains a leverage buffer of

tier 1 capital in an amount greater than 2 percent of its total leverage exposure is not subject to

limitations on distributions and discretionary bonus payments under the final rule.

Elsewhere in today’s Federal Register, the agencies are proposing changes to the 2013

revised capital rule’s supplementary leverage ratio, including changes to the definition of total

leverage exposure, which would apply to all advanced approaches banking organizations and

thus, if adopted, would affect banking organizations subject to this final rule.

EFFECTIVE DATE: The final rule is effective January 1, 2018.

3

FOR FURTHER INFORMATION CONTACT:

OCC: Roger Tufts, Senior Economic Advisor, (202) 649-6981; Nicole Billick, Risk Expert,

(202) 649-7932, Capital Policy; or Carl Kaminski, Counsel; or Henry Barkhausen, Attorney,

Legislative and Regulatory Activities Division, (202) 649-5490, Office of the Comptroller of the

Currency, 400 7th Street S.W., Washington, DC 20219.

Board: Constance M. Horsley, Assistant Director, (202) 452-5239; Juan C. Climent, Senior

Supervisory Financial Analyst, (202) 872-7526; or Sviatlana Phelan, Senior Financial Analyst,

(202) 912-4306, Capital and Regulatory Policy, Division of Banking Supervision and

Regulation; or Benjamin McDonough, Senior Counsel, (202) 452-2036; April C. Snyder, Senior

Counsel, (202) 452-3099;or Mark C. Buresh, Attorney, (202) 452-5270, Legal Division, Board

of Governors of the Federal Reserve System, 20th and C Streets, N.W., Washington, DC 20551.

For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.

FDIC: George French, Deputy Director, [email protected]; Bobby R. Bean, Associate Director,

[email protected]; Ryan Billingsley, Chief, Capital Policy Section, [email protected]; Karl

Reitz, Chief, Capital Markets Strategies Section, [email protected]; Capital Markets Branch,

Division of Risk Management Supervision, [email protected] or (202) 898-6888; or

Mark Handzlik, Counsel, [email protected]; Michael Phillips, Counsel, [email protected];

Rachel Ackmann, Senior Attorney, [email protected]; Supervision Branch, Legal Division,

Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

On August 20, 2013, the agencies published in the Federal Register, for public comment,

a joint notice of proposed rulemaking (the 2013 NPR) to strengthen the agencies’ supplementary

4

leverage ratio standards for large, interconnected U.S. banking organizations.1 As noted in the

2013 NPR, the recent financial crisis showed that some financial companies had grown so large,

leveraged, and interconnected that their failure could pose a threat to overall financial stability.

The sudden collapses or near-collapses of major financial companies were among the most

destabilizing events of the crisis. As a result of the imprudent risk taking of major financial

companies and the severe consequences to the financial system and the economy associated with

the disorderly failure of these companies, the U.S. government (and many foreign governments

in their home countries) intervened on an unprecedented scale to reduce the impact of, or

prevent, the failure of these companies and the attendant consequences for the broader financial

system.

A perception persists in the markets that some companies remain “too big to fail,” posing

an ongoing threat to the financial system. First, the perception that certain companies are “too

big to fail” reduces the incentives of shareholders, creditors and counterparties of these

companies to discipline excessive risk-taking by the companies. Second, it produces competitive

distortions because those companies can often fund themselves at a lower cost than other

companies. This distortion is unfair to smaller companies, damaging to fair competition, and

may artificially encourage further consolidation and concentration in the financial system.

An important objective of the Dodd-Frank Wall Street Reform and Consumer Protection

Act of 2010 (Dodd-Frank Act) is to mitigate the threat to financial stability posed by

systemically-important financial companies.2 The agencies have sought to address this concern

through enhanced supervisory programs, including heightened supervisory expectations for

1 78 FR 51101 (August 20, 2013). 2 See, e.g., Pub. L. 111-203, 124 Stat. 1376, 1394, 1571, 1803 (2010).

5

large, complex institutions and stress testing requirements. In addition, the Dodd-Frank Act

mandates the implementation of a multi-pronged approach to address this concern: a new orderly

liquidation authority for financial companies (other than banks and insurance companies); the

establishment of the Financial Stability Oversight Council, empowered with the authority to

designate nonbank financial companies for Board supervision (designated nonbank financial

companies); stronger regulation of large BHCs and designated nonbank financial companies

through enhanced prudential standards; and enhanced regulation of over-the-counter (OTC)

derivatives, other core financial markets and financial market utilities.

This final rule builds on these efforts by adopting enhanced supplementary leverage ratio

standards for the largest and most interconnected U.S. banking organizations. The agencies have

broad authority to set regulatory capital standards.3 As a general matter, the agencies’ authority

to set regulatory capital requirements and standards for the institutions they regulate derives from

the International Lending Supervision Act (ILSA)4 and the PCA provisions5 of the Federal

Deposit Insurance Act (FDIA). In enacting ILSA, Congress codified its intentions, providing

that “it is the policy of the Congress to assure that the economic health and stability of the United

States and the other nations of the world shall not be adversely affected or threatened in the

future by imprudent lending practices or inadequate supervision.”6 ILSA encourages the

agencies to work with their international counterparts to establish effective and consistent

3 The agencies have authority to establish capital requirements for depository institutions under the prompt corrective action provisions of the Federal Deposit Insurance Act (12 U.S.C. 1831o). In addition, the Federal Reserve has broad authority to establish various regulatory capital standards for BHCs under the Bank Holding Company Act and the Dodd-Frank Act. See, for example, sections 165 and 171 of the Dodd-Frank Act (12 U.S.C. 5365 and 12 U.S.C. 5371). 4 12 U.S.C. 3901-3911. 5 12 U.S.C. 1831o. 6 12 U.S.C. 3901(a).

6

supervisory policies, standards, and practices and specifically provides the agencies authority to

set broadly applicable minimum capital levels7 as well as individual capital requirements.8

Additionally, ILSA specifically directs U.S. regulators to encourage governments, central banks,

and bank regulatory authorities in other major banking countries to work toward maintaining

and, where appropriate, strengthening the capital bases of banking institutions involved in

international banking.9 With its focus on international lending and the safety of the broader

financial system, ILSA provides the agencies with the authority to consider an institution’s

interconnectedness and other systemic factors when setting capital standards.

As part of the overall prudential framework for bank capital, the agencies have long

expected institutions to maintain capital well above regulatory minimums and have monitored

banking organizations’ capital adequacy through the supervisory process in accordance with this

expectation. This expectation is also codified for IDIs in the statutory PCA framework, which

requires the agencies to establish capital ratio thresholds for both leverage and risk-based capital

that banking organizations must satisfy to be considered well capitalized.

Additionally, section 165 of the Dodd-Frank Act requires the Board to develop enhanced

prudential standards for BHCs with total consolidated assets of $50 billion or more and for

designated nonbank companies (together, section 165 covered companies).10 The Dodd-Frank

Act requires that prudential standards for section 165 covered companies include enhanced

7 “Each appropriate Federal banking agency shall cause banking institutions to achieve and maintain adequate capital by establishing levels of capital for such banking institutions and by using such other methods as the appropriate Federal banking agency deems appropriate.” 12 U.S.C. 3907(a)(1). 8 “Each appropriate Federal banking agency shall have the authority to establish such minimum level of capital for a banking institution as the appropriate Federal banking agency, in its discretion, deems to be necessary or appropriate in light of the particular circumstances of the banking institution.” 12 U.S.C. 3907(a)(2). 9 12 U.S.C. 3907(b)(3)(C). 10 See 12 U.S.C. 5365; 77 FR 593 (January 5, 2012); and 77 FR 76627 (December 28, 2012).

7

leverage standards. In general, the Dodd-Frank Act directs the Board to implement enhanced

prudential standards that strengthen existing micro-prudential supervision and regulation of

individual companies and incorporate macro-prudential considerations to reduce threats posed by

section 165 covered companies to the stability of the financial system as a whole. The enhanced

prudential standards must increase in stringency based on the systemic footprint and risk

characteristics of individual companies. When differentiating among companies for purposes of

applying the standards established under section 165, the Board may consider the companies’

size, capital structure, riskiness, complexity, financial activities, and any other risk-related

factors the Board deems appropriate.11

In the agencies’ experience, strong capital is an important safeguard that helps financial

institutions navigate periods of financial or economic stress. Maintenance of a strong capital

base at the largest, systemically important institutions is particularly important because capital

shortfalls at these institutions can contribute to systemic distress and can have material adverse

economic effects. Higher capital standards for these institutions would place additional private

capital at risk, thereby reducing the risks for the Deposit Insurance Fund while improving the

ability of these institutions to serve as a source of credit to the economy during times of

economic stress. Furthermore, the agencies believe that the enhanced supplementary leverage

ratio standards would reduce the likelihood of resolutions, and would allow regulators to tailor

resolution efforts were a resolution to become necessary. By further enhancing the capital

strength of covered organizations, the enhanced supplementary leverage ratio standards could

counterbalance possible funding cost advantages that these organizations may enjoy as a result of

being perceived as “too big to fail.”

11 12 U.S.C. 5365(a)(2)(A).

8

A. The Supplementary Leverage Ratio

The 2013 revised capital rule comprehensively revises and strengthens the capital

regulations applicable to banking organizations.12 It strengthens the definition of regulatory

capital, increases the minimum risk-based capital requirements for all banking organizations, and

modifies the requirements for how banking organizations calculate risk-weighted assets. The

2013 revised capital rule also retains the generally applicable leverage ratio requirement

(generally applicable leverage ratio) that the agencies believe to be a simple and transparent

measure of capital adequacy that is credible to market participants and ensures a meaningful

amount of capital is available to absorb losses. The minimum generally applicable leverage ratio

requirement13 of 4 percent applies to all IDIs, and is the “generally applicable” leverage ratio for

purposes of section 171 of the Dodd-Frank Act. Accordingly, the minimum tier 1 leverage ratio

requirement for depository institution holding companies is also 4 percent.14

In the 2013 revised capital rule, the agencies established a minimum supplementary

leverage ratio requirement of 3 percent for banking organizations subject to the banking

agencies’ advanced approaches rules (advanced approaches banking organizations)15 based on

the BCBS’s Basel III leverage ratio (Basel III leverage ratio) as it was established at the time.16

12 78 FR 55340 (September 10, 2013) (FDIC) and 78 FR 62018 (October 11, 2013) (OCC and Board). On April 8, 2014, the FDIC adopted as final the 2013 revised capital rule, with no substantive changes. 13 The generally applicable leverage ratio under the 2013 revised capital rule is the ratio of a banking organization’s tier 1 capital to its average total consolidated assets as reported on the banking organization’s regulatory report minus amounts deducted from tier 1 capital. 14 12 U.S.C. 5371. 15 A banking organization is subject to the advanced approaches rule if it has consolidated assets of at least $250 billion, if it has total consolidated on-balance sheet foreign exposures of at least $10 billion, if it elects to apply the advanced approaches rule, or it is a subsidiary of a depository institution, bank holding company, or savings and loan holding company that uses the advanced approaches to calculate risk-weighted assets. See 78 FR 62018, 62204 (October 11, 2013); 78 FR 55340, 55523 (September 10, 2013). 16 The BCBS is a committee of banking supervisory authorities, which was established by the central bank governors of the G–10 countries in 1975. It currently consists of senior representatives of bank supervisory

9

The agencies believe the introduction of the leverage ratio by the BCBS is an important step in

improving the framework for international capital standards. The Basel III leverage ratio is a

non-risk-based measure of tier 1 capital relative to an exposure amount that includes both on-

and off-balance sheet exposures. The agencies implemented the Basel III leverage ratio through

the supplementary leverage ratio, which the agencies believe to be particularly relevant for large,

complex organizations that are internationally active and often have substantial off-balance sheet

exposures.

The agencies’ supplementary leverage ratio is the arithmetic mean of the ratio of an

advanced approaches banking organization’s tier 1 capital to total leverage exposure (each as

defined in the 2013 revised capital rule) calculated as of the last day of each month in the

reporting quarter. In contrast to the denominator of the agencies’ generally applicable leverage

ratio, which includes only on-balance sheet assets, the denominator for the supplementary

leverage ratio is based on a banking organization’s total leverage exposure, which includes all

on-balance sheet assets and many off-balance sheet exposures. The 2013 revised capital rule

requires that an advanced approaches banking organization calculate and report its

supplementary leverage ratio beginning in 2015 and maintain a supplementary leverage ratio of

at least 3 percent beginning in 2018.

Because total leverage exposure includes off-balance sheet exposures, for any given

company with material off-balance sheet exposures the amount of capital required to meet the

supplementary leverage ratio will exceed the amount of capital that is required to meet the

authorities and central banks from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. Documents issued by the BCBS are available through the Bank for International Settlements Web site at http://www.bis.org. See BCBS, “Basel III: A global regulatory framework for more resilient banks and banking systems” (December 2010 (revised June 2011)), available at http://www.bis.org/publ/bcbs189.htm.

10

generally applicable leverage ratio, assuming that both ratios are set at the same level. To

illustrate, as the agencies noted in the 2013 NPR, based on supervisory estimates for a group of

advanced approaches banking organizations using supervisory data as of third quarter 201217, a

5 percent supplementary leverage ratio corresponds to roughly a 7.2 percent generally applicable

leverage ratio and a 6 percent supplementary leverage ratio corresponds to roughly an

8.6 percent generally applicable leverage ratio. According to supervisory estimates, 2013 data

yield similar results. These estimates represent averages and the numbers vary from institution

to institution.

The agencies noted in the 2013 revised capital rule and in the 2013 NPR that the BCBS

planned to collect additional data from institutions in member countries and potentially make

adjustments to the Basel III leverage ratio requirement. The agencies indicated that they would

review any modifications to the Basel III leverage ratio made by the BCBS and consider

proposing to modify the supplementary leverage ratio consistent with those revisions, as

appropriate.

In June 2013, the BCBS published and requested comment on a consultative paper that

proposed significant modifications to the denominator of the Basel III leverage ratio

(consultative paper).18 The consultative paper proposed a number of approaches that generally

would increase the denominator of the leverage ratio originally set out in the 2010 Basel III

framework. Based on its review of comments on the consultative paper, in January 2014, the

BCBS adopted certain aspects of the proposals in the consultative paper as well as other changes

17 The supervisory estimates were generated using CCAR September 2012 and CCAR September 2013 data. 18 See BCBS “Revised Basel III leverage ratio framework and disclosure requirements - consultative document” (June 2013) available at http://www.bis.org/publ/bcbs251.htm.

11

to the denominator (BCBS 2014 revisions).19 The BCBS has indicated that it will continue to

study the Basel III leverage ratio through the implementation phase into 2017 and will consider

further modifications to the ratio.

As discussed further below, several commenters raised concerns about the agencies’

intention to adopt the proposed enhanced supplementary leverage ratio standards while the

BCBS continues to revise the Basel III leverage ratio. The agencies believe that it is important to

maintain consistency with international standards, as appropriate, for internationally active

banking organizations and, accordingly, have published a separate notice of proposed

rulemaking elsewhere in today’s Federal Register that seeks public comment on revisions to the

denominator of the supplementary leverage ratio that would be applicable to advanced

approaches banking organizations (2014 NPR). These proposed revisions are generally

consistent with the BCBS 2014 revisions.

The agencies also believe that it is important to establish enhanced supplementary

leverage ratio standards for the largest, most interconnected banking organizations to strengthen

the overall regulatory capital framework in the United States. Therefore, after reviewing

comments on the 2013 NPR, the agencies are finalizing the enhanced supplementary leverage

ratio standards substantially as proposed, based on the methodology for determining the

supplementary leverage ratio in the 2013 revised capital rule. As discussed further below, the

agencies believe the proposed changes to the supplementary leverage ratio denominator in the

2014 NPR would be responsive to some of the concerns that commenters raised in connection

with the 2013 NPR. The agencies will carefully consider all comments received on the proposed

19 See BCBS “Basel III leverage ratio framework and disclosure requirements” (January 2014) available at http://www.bis.org/publ/bcbs270.htm.

12

revisions to the supplementary leverage ratio calculation in the 2014 NPR, including those

related to the impact of the proposed changes on advanced approaches banking organizations’

capital requirements.

B. The Proposed Enhanced Supplementary Leverage Ratio Standards

The 2013 NPR proposed applying enhanced supplementary leverage standards to any

U.S. top-tier BHC that has more than $700 billion in total consolidated assets or more than $10

trillion in assets under custody and any IDI subsidiary of such a BHC.20 As explained in the

2013 NPR, the list of covered BHCs identified by these thresholds is consistent with the list of

banking organizations that meet the BCBS definition of a global systemically important bank (G-

SIB), based on year-end 2011 data. 21 In November 2011, the BCBS released a document

entitled, Global Systemically Important Banks (G-SIBs): assessment methodology and the

additional loss absorbency requirement, which sets out a framework for a new capital surcharge

for G-SIBs (BCBS G-SIB framework).22 The BCBS G-SIB framework incorporates five broad

characteristics of a banking organization that the agencies consider to be good proxies for, and

correlated with, systemic importance: size, complexity, interconnectedness, lack of substitutes,

and cross-border activity. Further, the Board believes that the criteria and methodology used by

the BCBS to identify G-SIBs are consistent with the criteria it must consider under the Dodd-

20 Under the 2013 NPR, applicability of the proposed enhanced supplementary leverage ratio standards would have been determined based on assets reported on a BHC’s most recent Consolidated Financial Statement for Bank Holding Companies (FR Y–9C) or based on assets under custody as reported on a BHC’s most recent Banking Organization Systemic Risk Report (FR Y–15). 21 In November 2012, the Financial Stability Board and BCBS published a list of banks that meet the BCBS definition of a G-SIB based on year-end 2011 data. A revised list based on year-end 2012 data was published November 11, 2013 (available at http://www.financialstabilityboard.org/publications/r_131111.pdf). The U.S. top-tier bank holding companies that are currently identified as G-SIBs are Bank of America Corporation, The Bank of New York Mellon Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan Chase & Co., Morgan Stanley, State Street Corporation, and Wells Fargo & Company. 22 Available at http://www.bis.org/publ/bcbs207.pdf. The BCBS published a revised version of this document in July 2013, available at http://www.bis.org/publ/bcbs255.pdf.

13

Frank Act when tailoring enhanced prudential standards based on the systemic footprint and risk

characteristics of individual section 165 covered companies.23

Under the 2013 NPR, a covered BHC would have been subject to a leverage buffer

composed of tier 1 capital, in addition to the minimum 3 percent supplementary leverage ratio

requirement established in the 2013 revised capital rule. Under the 2013 NPR, a covered BHC

that maintains a leverage buffer of tier 1 capital in an amount greater than 2 percent of its total

leverage exposure would not have been subject to limitations on its distributions and

discretionary bonus payments. If a covered BHC were to maintain a leverage buffer of 2 percent

or less, it would have been subject to increasingly strict limitations on its distributions and

discretionary bonus payments. The proposed leverage buffer followed the same general

mechanics and structure as the capital conservation buffer contained in the 2013 revised capital

rule. Any constraints on distributions and discretionary bonus payments resulting from a

covered BHC maintaining a leverage buffer of 2 percent or less would have been independent of

any constraints imposed by the capital conservation buffer or other supervisory or regulatory

measures.

As noted in the 2013 NPR, the 2013 revised capital rule incorporated the 3 percent

supplementary leverage ratio minimum requirement into the PCA framework as an adequately

capitalized threshold for IDIs subject to the advanced approaches risk-based capital rules, but did

not establish a well-capitalized threshold for this ratio. Under the 2013 NPR, an IDI that is a

subsidiary of a covered BHC would have been required to satisfy a 6 percent supplementary

leverage ratio to be considered well-capitalized for PCA purposes.

II. Summary of Comments on the 2013 NPR

23 See 12 U.S.C. 5365(a).

14

The agencies sought comment on all aspects of the 2013 NPR and received

approximately 30 public comments from banking organizations, trade associations representing

the banking or financial services industry, supervisory authorities, public interest advocacy

groups, private individuals, members of Congress, and other interested parties. In general,

comments from financial services firms, banking organizations, banking trade associations and

other industry groups were critical of the 2013 NPR, while comments from organizations

representing smaller banks or their supervisors, public interest advocacy groups and the public

generally were supportive of the 2013 NPR. A detailed discussion of commenters’ concerns and

the agencies’ response follows.

A. Timing of the final rule

A number of commenters made reference to the BCBS consultative paper that proposed

to revise the denominator for the Basel III leverage ratio. 24 While the proposals outlined in the

BCBS consultative paper were not part of the 2013 NPR, commenters stated that they believe the

final BCBS changes eventually will be incorporated into the U.S. supplementary leverage ratio,

and that it would be premature to finalize the 2013 NPR before the BCBS process is complete.

Commenters recommended that a final rule adopting the proposed enhanced supplementary

leverage ratio standards be delayed until the BCBS finalized the consultative paper and the

Board adopted a final rule implementing enhanced prudential standards under section 165 of the

Dodd Frank Act.25 In addition, these commenters argued that the proposed enhanced

24 See BCBS, “Revised Basel III leverage ratio framework and disclosure requirements - consultative document” (June 2013), available at http://www.bis.org/publ/bcbs251.htm. 25 The Board’s proposed rules to implement the provisions of sections 165 and 166 of the Dodd-Frank Act for bank holding companies with total consolidated assets of $50 billion or more and for nonbank financial firms supervised by the Board (domestic proposal) and for foreign banking organizations with total consolidated assets of $50 billion or more and foreign nonbank financial companies supervised by the Board (foreign proposal) can be found at 77 FR 594 (January 5, 2012) and 77 FR 76628 (December 28, 2012) for the domestic proposal and foreign proposal,

15

supplementary leverage ratio standards, if applied in conjunction with the denominator changes

proposed in the BCBS consultative paper, would result in inappropriately high capital charges.

The agencies emphasize that the 2013 NPR did not propose or seek comment on the

revisions to the supplementary leverage ratio denominator that were being considered by the

BCBS. The agencies are moving forward with the finalization of the proposed enhanced

supplementary leverage ratio standards to further enhance the capital position of covered

organizations and to strengthen financial stability. As noted earlier, the agencies are seeking

comment elsewhere in today’s Federal Register on the 2014 NPR, which proposes revisions to

the definition of total leverage exposure in the 2013 revised capital rule as well as other proposed

requirements relating to the supplementary leverage ratio that would reflect the BCBS 2014

revisions. The agencies believe that the proposed revisions to the definition of total leverage

exposure in the 2014 NPR are responsive to a number of concerns that commenters expressed

about the relationship between the BCBS process and the supplementary leverage ratio. As

noted above, the agencies will carefully review all comments received on the 2014 NPR.

B. Scope of Application

The 2013 NPR would have applied enhanced supplementary leverage ratio standards to

the largest, most interconnected U.S. BHCs and their subsidiary IDIs (specifically, to any U.S.

top-tier BHC with more than $700 billion in total consolidated assets or more than $10 trillion in

assets under custody and any IDI subsidiary of these BHCs). 26 Several commenters criticized

the 2013 NPR’s scope of application, including the proposed quantitative thresholds for respectively. The Board’s final rule implementing these provisions is available at http://www.federalreserve.gov/newsevents/press/bcreg/20140218a.htm. 26 Under the 2013 revised capital rule, a “subsidiary” is defined as a company controlled by another company, and a person or company “controls” a company if it: (1) owns, controls, or holds with power to vote 25 percent or more of a class of voting securities of the company; or (2) consolidates the company for financial reporting purposes. See section 2 of the 2013 revised capital rule.

16

determining applicability of the enhanced supplementary leverage ratio standards. These

commenters stated that tying the application of the 2013 NPR to size alone would not be

appropriate, as size is not always a reliable indicator of the degree of risk to financial stability.

In addition, commenters stated that the quantitative thresholds may capture the G-SIBs today,

but there is no assurance that this will be the case in the future. A few commenters asserted that

applicability should be based on the systemic risk posed by an institution’s failure and not just on

quantitative thresholds. For instance, one commenter suggested extending the applicability of

the final rule beyond the largest financial institutions to institutions that are smaller, but

nonetheless are integral parts of the financial system. A few commenters favored expanding the

quantitative thresholds of the 2013 NPR to include additional banking organizations, for

example, by applying the proposed enhanced supplementary leverage ratio standards to all

advanced approaches banking organizations. Some commenters asserted that using assets under

custody as one of the metrics to determine the 2013 NPR’s applicability significantly overstates

the risk of the custody bank business model. In addition, several commenters suggested that it is

not clear that the enhanced supplementary leverage ratio standards are necessary or appropriate

for any organization. These commenters stated that substantial steps have been taken toward

addressing “too big to fail” concerns, and that the 2013 NPR should not be extended to banking

organizations that, in the commenters’ view, may not present systemic risk.

The agencies have decided to finalize the proposed enhanced supplementary leverage

ratio standards, including the proposed applicability thresholds, substantively as proposed. In the

agencies’ view, the proposed asset thresholds capture banking organizations that are so large or

interconnected that they pose substantial systemic risk. As explained above, these banking

organizations have also been identified by the BCBS as G-SIBs, which are subject to heightened

17

risk-based capital standards under the Basel framework. The agencies believe the application of

the enhanced supplementary leverage ratio standards to covered organizations is an appropriate

way to further strengthen the ability of the these organizations to remain a going concern during

times of economic stress and to minimize the likelihood that problems at these organizations

would contribute to financial instability.

The agencies continue to believe that the benefits to financial stability of the enhanced

supplementary leverage ratio standards are most pronounced for these large and systemically

important institutions, and have decided not to extend these enhanced standards to smaller

institutions. In addition, as also discussed in the 2013 NPR, it is anticipated that over time, as the

BCBS G-SIB framework is implemented in the United States or revised by the BCBS, the

agencies may consider modifying the scope of application of the enhanced supplementary

leverage ratio standards to align more closely with the scope of application of the BCBS G-SIB

framework. In addition, the agencies will otherwise continue to evaluate the applicability

thresholds and may consider revising them in the future to ensure they remain appropriate.

C. Calibration of the Enhanced Supplementary Leverage Ratio Standards

The agencies received several comments expressing concern with the proposed

calibration of the enhanced supplementary leverage ratio standards. Commenters stated that the

proposed enhanced supplementary leverage ratio standards should be set no higher than those

that would apply to banking organizations in other jurisdictions to maintain the competitive

position of covered organizations with respect to their foreign competitors. A number of

commenters viewed the proposed calibration as arbitrary, stating that it should be supported by

quantitative studies of the cumulative impact of the enhanced supplementary leverage ratio

standards and other financial reforms on the ability of U.S. banking organizations to provide

18

financial services to customers and businesses. A number of commenters stated that the 2013

NPR would cause the supplementary leverage ratio to become the binding regulatory capital

constraint, rather than a backstop to the risk-based capital measures, and expressed concern that

an unintended consequence of a binding supplementary leverage ratio could be that covered

organizations would divest lower risk assets and instead assume more risk, to the detriment of

financial stability.

Some commenters expressed concern that a binding supplementary leverage ratio could

have negative consequences, including the creation of disincentives for banking organizations to

engage in robust risk assessment and management practices. Furthermore, according to

commenters, the 2013 NPR could incentivize banking organizations to engage in financial

activities with a higher risk-reward profile as there would be no regulatory capital benefit for

holding low-risk assets, potentially resulting in institutions that are less stable. For instance, one

commenter stated that unsecured commercial loans would be more attractive than secured lines

of credit because the former have a stronger return on assets and both would require equal

amounts of regulatory capital under the supplementary leverage ratio framework. The

commenter warned that in the mortgage banking industry, this could constrain warehouse lines

of credit needed to finance the production of new mortgages and mortgage-backed securities.

Another commenter stated that the proposed enhanced supplementary leverage ratio standards

could make it uneconomical for covered organizations to hold or provide unfunded revolving

lines of credit with maturities of less than one year, cash, U.S. Treasuries, reverse repurchase

agreements, certain traditional interest rate swaps, and credit default swaps on corporate bonds.

Other commenters maintained that the 2013 NPR could incentivize banking organizations to

hold the lowest quality assets possible within the constraints of the other credit quality

19

regulations and, thus, would be fundamentally at odds with the agencies’ proposed liquidity

coverage ratio (LCR) by encouraging banking organizations to divest low-risk assets above the

minimum required by the proposed LCR.27 In addition, according to commenters, banking

organizations would find high-volume, low-risk and low-return, client-driven financial activities

less profitable, such as deposit taking. As such, commenters stated that a binding leverage ratio

would result in higher prices, less liquidity, and reduction of business lines that have lower

returns on assets.

Some commenters recommended that the agencies use a more tailored approach to

calibrate the proposed enhanced supplementary leverage ratio standards, for example by

proposing a leverage buffer for covered BHCs that would be aligned with the capital surcharges

provided in the BCBS G-SIB framework. These commenters asserted that there is significant

diversity among G-SIBs in risk profile, operating structure, and approaches to balance sheet

management and that a one-size-fits-all approach is unduly punitive for banking organizations

with significant amounts of highly liquid, low-risk assets.

In contrast, a few commenters stated that the supplementary leverage ratio is a more

accurate measure of regulatory capital than the risk-based capital ratios, easier to understand,

comparable across firms, less prone to manipulation and, therefore, should be the binding capital

standard. Commenters supported a revised calibration as strong, or stronger, than the one set

forth in the 2013 NPR. For example, some commenters suggested substantially increasing the

proposed enhanced supplementary leverage ratio standards for covered organizations (for

example, by implementing an 8 percent well-capitalized threshold for any IDI subsidiary of a

27 On November 29, 2013, the agencies issued a joint notice of proposed rulemaking that would implement quantitative liquidity requirements for certain banking organizations. See 78 FR 71818 (November 29, 2013).

20

covered BHC and a 4 or 5 percent leverage buffer (in addition to the minimum 3 percent) for

covered BHCs). These commenters argued that incentivizing covered organizations to be better

capitalized as a group through the proposed standards would improve their ability to provide

credit during periods of economic stress. Others supported either increasing or maintaining the

proposed calibration of the enhanced supplementary leverage ratio standards by emphasizing the

importance of constraining the risks large institutions pose to the financial system. Other

commenters supported strengthening the supplementary leverage ratio standards based on their

view that the risk-based capital framework is subjective and may excessively rely on the use of

models.

With regard to the concerns raised by commenters about potential competitive

disadvantages for covered organizations as a result of the proposed enhanced supplementary

leverage ratio standards, in the agencies’ experience, a strong regulatory capital base is a

competitive strength for banking organizations, rather than a competitive weakness. Specifically,

strong capital promotes confidence among banking organizations’ market counterparties and

bolsters the ability of banking organizations to lend and otherwise serve customers during

stressed market conditions. The agencies are of the view that a strongly capitalized banking

system also promotes the resilience of the broader economy because it promotes the stability of

the financial system, which allows a wide range of firms to efficiently access funding and

liquidity to meet their business needs. The agencies also note that banking organizations in the

U.S. have long been subject to a leverage ratio framework, whereas banking organizations in

other jurisdictions generally have not been subject to any leverage requirement. The agencies do

not believe this longstanding difference has adversely affected the competitive strength of U.S.

banking organizations. Finally, the agencies believe that the benefits to the banking and

21

financial system from more resilient systemically important banking organizations outweigh any

potential competitive disadvantages of related implementation costs that covered organizations

may face.

With regard to the comments asserting that the proposed enhanced supplementary

leverage ratio standards were arbitrary, the 2013 NPR described the agencies’ approach to

calibration. According to the agencies’ analysis, a 3 percent minimum supplementary leverage

ratio would have been too low to have meaningfully constrained the buildup of leverage at the

largest institutions in the years leading up to the financial crisis. To address this issue the

agencies proposed the enhanced supplementary leverage ratio standards.

The agencies believe that the leverage and risk-based capital ratios play complementary

roles, with each offsetting potential weaknesses of the other. The 2013 revised capital rule

implemented the capital conservation buffer framework (which is only applicable to risk-based

capital ratios) and increased risk-based capital requirements more than it increased leverage

requirements, reducing the ability of the leverage requirements to act as an effective complement

to the risk-based requirements, as they had historically. As a result, the degree to which covered

organizations could potentially benefit from active management of risk-weighted assets before

they breach the leverage requirements may be greater. As described in the 2013 NPR, such

potential behavior suggests that the increase in stringency of the leverage and risk-based

standards should be more closely calibrated to each other so that they remain in an effective

complementary relationship. These considerations were important in calibrating the enhanced

supplementary leverage ratio standards. Specifically, the 2013 NPR noted that the proposed

enhanced supplementary leverage ratio’s well-capitalized threshold for IDI subsidiaries of

covered BHCs and the proposed leverage buffer for covered BHCs would retain a degree of

22

proportionality with the stronger tier 1 risk-based capital standards (including the minimum risk-

based capital requirements and the capital conservation buffer) under the 2013 revised capital

rule.

Consistent with the calibration goals described in the 2013 NPR, the agencies believe that

the proposed enhanced supplementary leverage ratio standards should broadly preserve the

historical relationship between the tier 1 leverage and risk-based capital levels for covered

organizations, rather than fundamentally alter such a relationship as several commenters suggest.

With respect to IDI subsidiaries of covered BHCs, the increase in stringency in terms of the

additional tier 1 capital that would be required to be well capitalized under the enhanced

supplementary leverage ratio standards is roughly equivalent to the increase in stringency

resulting from the application of the 2013 revised capital rule’s risk-based capital standards.

Moreover, in response to comments suggesting that the supplementary leverage ratio

well-capitalized threshold for an IDI subsidiary of a covered BHC should result in the same

amount of capital needed by a covered BHC to meet the minimum supplementary ratio

requirement plus the proposed leverage buffer, the agencies note that the PCA framework and

the proposed leverage buffer were designed for different purposes. The PCA framework is

intended to ensure that problems at depository institutions are addressed promptly and at the least

cost to the Deposit Insurance Fund. The leverage buffer (as well as the capital conservation

buffer) was designed and calibrated to provide incentives to banking organizations to hold

sufficient capital to reduce the risk that their capital levels would fall below their minimum

requirements during times of economic and financial stress. In addition, as discussed in the 2013

NPR, the relationship between the 5 percent supplementary leverage ratio for covered BHCs

(resulting from the 3 percent minimum supplementary leverage ratio plus the 2 percent leverage

23

buffer) and the 6 percent supplementary leverage ratio’s well-capitalized threshold for IDI

subsidiaries of covered BHCs is generally structurally consistent with the relationship between

the 4 percent minimum leverage ratio for BHCs and the 5 percent well-capitalized leverage ratio

threshold for IDIs under the generally applicable regulatory capital framework, including as

revised under the 2013 revised capital rule.

The agencies note that the maintenance of a complementary relationship between the

leverage and risk-based capital ratios is designed to mitigate any regulatory capital incentives for

covered organizations to inappropriately increase their risk profile in response to a binding

supplementary leverage ratio. Similarly, stress testing provides another mechanism to

counterbalance the risk that these institutions could potentially increase their risk profile in

response to a binding supplementary leverage ratio. If the supplementary leverage ratio is

binding and covered organizations acquire more higher-risk assets, risk weights should increase

until the risk-based capital framework becomes binding. Conversely, if a binding risk-based

capital ratio induces an institution to expand portfolios whose risk is insufficiently addressed by

the risk-based capital framework, its total leverage exposure would increase until the leverage

ratio becomes binding. Moreover, the agencies believe that banking organizations choose their

asset mix based on a variety of factors, including yields available relative to the overall cost of

funds, the need to preserve financial flexibility and liquidity, revenue generation and the

maintenance of market share and business relationships, and the likelihood that principal will be

repaid.

The agencies also believe that the enhanced supplementary leverage ratio standards,

together with the strong risk-based regulatory capital framework in the 2013 revised capital rule,

will increase stability and improve safety and soundness in the banking system. In particular, the

24

agencies believe that the complementary relationship between the enhanced supplementary

leverage ratio standards and the risk-based capital framework under the 2013 revised capital rule

will strengthen capital positions at covered organizations, thereby reducing the likelihood that

they fail or experience severe difficulties.

With regard to the comments suggesting that the calibration of the enhanced

supplementary leverage ratio should vary in accordance with the specific systemic footprint of a

covered organization, the agencies note that such issues are addressed in part by the risk-

differentiation that exists within the risk-based capital framework. The agencies believe that all

covered organizations, despite differences in business models, are systemically important and

highly interconnected and, therefore, uniformly-applied leverage capital standards across these

organizations are warranted.

D. Economic Impact of the 2013 NPR on Specific Types of Securities and Credit Transactions

and on the Custody Bank Business Model

Commenters also expressed concern about the effect the 2013 NPR would have for

particular types of transactions and business models. Commenters asserted that the 2013 NPR

would directly affect short-term securities financing transactions, including repurchase

agreements, reverse repurchase agreements, and revolving lines of credit, among other similar

transactions, by imposing additional capital requirements on low-risk exposures held by covered

organizations when they enter into these arrangements. Some commenters argued that the

enhanced supplementary leverage ratio standards may encourage covered organizations to reduce

their participation in securities financing transactions. One commenter also indicated that the

2013 NPR would result in the entrance into the securities financing transactions market of

smaller, less-experienced, and less well-capitalized counterparties who may fall outside existing

25

regulatory oversight, resulting in additional systemic risk due to insufficient oversight of these

counterparties. That commenter argued that the 2013 NPR may result in the overexposure to

individual counterparties, because covered organizations could conclude that securities financing

transactions are more costly to them and, as a result, may limit the availability (or the best terms)

of this financing to only those asset managers to whom they provide other lines of service. In

addition, commenters asserted that asset managers might respond by directing business to a

single large banking organization in order to receive the best terms for securities financing

transactions.

Several commenters argued that there would be less flexibility for mutual fund managers

and insurance companies to execute certain transactions with covered organizations as a result of

the enhanced supplementary leverage ratio standards, which could give rise to less liquid markets

at the time that liquidity is needed the most. These commenters indicated that when mutual fund

redemptions rise because individual investors desire liquidity, investment managers are required

to meet those redemption requests immediately, and that if many requests come at once, the

investment manager will use securities financing arrangements to smooth out the flow of capital,

rather than be forced to sell investments in a rapid or disorderly fashion. Commenters also noted

that if securities financing arrangements are less accessible, an investment manager may incur

higher costs related to the forced sale of underlying securities.

Some commenters suggested that the agencies recalibrate the enhanced supplementary

leverage ratio standards to better reflect the business model and risk profile of custody banks,

either through an approach tied to each covered company’s G-SIB risk-based capital surcharge

(which incorporates various measures to identify systemic risk) or an adjustment specific to these

organizations, because a one-size-fits-all approach would be unduly punitive for covered

26

organizations with significant amounts of highly liquid, low-risk assets. One commenter

asserted that custody banks have balance sheets that are uniquely constructed as they are built

around client deposits derived from the provision of core safekeeping and fund administration

services, whereas most other covered organizations feature extensive commercial and investment

banking operations. Some commenters asserted that the enhanced supplementary leverage ratio

standards would significantly punish or effectively limit important custody bank functions such

as those which are associated with central bank deposits and committed facilities. These

commenters also noted that the enhanced supplementary leverage ratio standards may limit the

ability of custody banks to accept deposits, particularly during periods of systemic stress. One

commenter asserted that global payment systems could be adversely affected by a reduction in

central bank balances, which are broadly used by banking organizations to reduce the risk of

payment failures and facilitate consistent and smooth payment flows. In addition, some

commenters asserted that the enhanced supplementary leverage ratio standards would reduce

incentives to hold low-risk assets and would increase the cost to comply with increased margin

requirements, particularly initial margin, for derivatives transactions. The agencies note that

several of the commenters’ concerns were related to aspects of the BCBS consultative paper.

With regard to the comments expressing concern about the impact of the enhanced

supplementary leverage ratio standards on securities financing transactions, the agencies believe

that certain provisions of the 2014 NPR would address several of these concerns. In addition, the

agencies believe it is important to consider that counterparties may view favorably a banking

organization’s maintenance of a meaningfully higher supplementary leverage ratio. To the

extent this occurs, there might be some reduction in a banking organization’s cost of funds that

potentially offsets any costs related to holding more regulatory capital. In this regard, the

27

agencies also note that any change in regulatory capital costs would affect a banking

organization’s overall cost of funds only to the extent it affects the weighted average cost of its

deposits, debt, and equity.

The agencies believe that using daily average balance sheet assets, rather than requiring

the average of three end-of-month balances in the calculation of the supplementary leverage ratio

under the 2013 revised capital rule would be an appropriate way to address the commenters’

concerns on the impact of spikes in deposits and, in the 2014 NPR, are proposing changes to the

calculation of total leverage exposure that would incorporate this concept.

Likewise, for purposes of determining total leverage exposure, the 2014 NPR would

permit cash variation margin that satisfies certain requirements to reduce the positive mark-to-

fair value of derivative contracts. The agencies believe this proposed revision in the 2014 NPR

would address the commenters’ concerns regarding the potential increase in the cost to comply

with increased margin requirements.

E. Measure of Capital Used as the Numerator of the Supplementary Leverage Ratio

The agencies sought comment on the appropriate measure of capital for the numerator of

the supplementary leverage ratio. Many commenters supported tier 1 capital as the appropriate

measure of capital for the numerator of the supplementary leverage ratio because it is designed

specifically to absorb losses on a going concern basis and has been meaningfully strengthened

under the 2013 revised capital rule.

One commenter encouraged the agencies to allow covered banking organizations to

include the amount of a covered organization’s allowance for loan and lease losses (ALLL)

because it is available to absorb losses. A few commenters, however, asserted that the numerator

of the supplementary leverage ratio should be common equity tier 1 (CET1) capital. One

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commenter supported this assertion with the observation that CET1 capital is the standard most

likely to keep an institution solvent and able to lend during periods of market distress, and

suggested it would be the only measure of capital strength trusted by the markets during a

financial crisis. Another commenter asserted that a tangible equity measure is preferable because

it is the most simple, transparent, and useful measure of loss-absorbing capital.

One commenter recognized the importance of having a single definition of tier 1 capital

for both risk-based and leverage requirements, but urged the agencies to revisit the treatment of

unrealized gains and losses included in accumulated other comprehensive income (AOCI) for

large banking organizations under the 2013 revised capital rule.

The agencies have considered the comments and have decided to retain tier 1 capital as

the numerator of the supplementary leverage ratio. The agencies agree that CET1 capital is the

most conservative measure of capital defined in the 2013 revised capital rule and has the highest

capacity to absorb losses, similar to most common descriptions of “tangible common equity.”

However, as a practical matter for U.S. banking organizations, tier 1 capital consists of CET1

capital plus non-cumulative perpetual preferred stock, a form of preferred stock that the agencies

believe has strong loss-absorbing capacity. Accordingly, the agencies believe that tier 1 capital,

as defined in the 2013 revised capital rule, is an appropriately conservative measure of capital for

the purposes of the supplementary leverage ratio. Furthermore, tier 1 capital incorporates

substantial regulatory adjustments and deductions that are not typically made from market

measures of tangible equity. Moreover, using tier 1 capital as the numerator of the

supplementary leverage ratio has the advantage of maintaining consistency with the numerator of

the leverage ratio that has long applied broadly to U.S. banking organizations and that now

applies to banking organizations in other jurisdictions adopting the Basel III leverage ratio.

29

With respect to allowing covered banking organizations to include ALLL as part of the

capital measure for the numerator, the agencies note that ALLL is partially includable in tier 2

capital under the risk-based capital framework and under the 2013 revised capital rule.

However, ALLL is not includable in tier 1 capital and the agencies believe that such an inclusion

would weaken the quality of tier 1 capital as it relates to the supplementary leverage ratio when

compared to the risk-based capital framework.

The agencies considered comments on the recognition of unrealized gains and losses in

AOCI in connection with the development of the 2013 revised capital rule, which requires

advanced approaches banking organizations to recognize unrealized gains and losses in AOCI

for purposes of determining CET1 capital.28 The agencies believe that requiring a banking

organization to reflect unrealized gains and losses in regulatory capital provides a more accurate

depiction of its loss-absorption capacity at a specific point in time, which is particularly

important for large, internationally active banking organizations. For this reason and the reasons

discussed above, the agencies are retaining tier 1 capital as the numerator of the enhanced

supplementary leverage ratio standards under this final rule.29

F. Total Leverage Exposure Definition

The 2013 NPR would not have amended the definition of total leverage exposure (the

denominator of the supplementary leverage ratio) under the 2013 revised capital rule. However,

a significant number of commenters criticized the components and methodology for calculating

total leverage exposure.

28 Banking organizations that are not subject to the advanced approaches rule may elect to opt out of the requirement to recognize unrealized gains and losses in AOCI for purposes of determining CET1 capital. 29 See section III.C. of the preamble in the 2013 final capital rule issued by the Board and OCC for a discussion of accumulated other comprehensive income. 78 FR 62018, 62026-62027 (October 11, 2013). See section V.B.2.c. of the preamble in the 2013 interim final capital rule issued by the FDIC for a discussion of accumulated other comprehensive income. 78 FR 55340, 55377-55380 (September 10, 2013).

30

Many commenters asserted that total leverage exposure should be more risk-sensitive.

For instance, commenters encouraged the agencies to exclude highly liquid assets, such as cash

on hand and claims on central banks, and sovereign securities, particularly U.S. Treasuries, from

total leverage exposure. Commenters maintained that, if the agencies opt to not exclude risk-free

or very low-risk, highly liquid assets from total leverage exposure, then these assets should be

discounted according to their relative levels of liquidity similar to the categories of eligible assets

under the standardized approach in the 2013 revised capital rule. In addition, commenters stated

that bank deposits with central banks such as the Federal Reserve Banks should be excluded in

order to accommodate increases in banks’ assets, both temporary and sustained, that occur as a

result of macroeconomic factors and monetary policy decisions, particularly during periods of

financial market stress. Commenters urged the agencies to exclude assets such as U.S.

government obligations securing public sector entity (PSE) deposits from total leverage

exposure. Commenters argued that a banking organization holding PSE deposits is required to

pledge U.S. Treasuries to collateralize the deposits, and that if U.S. Treasuries are not excluded

from total leverage exposure, the cost of additional capital would result in higher costs being

passed on to the PSEs. Another commenter, however, asked that the agencies not introduce any

risk-based capital measure into the supplementary leverage ratio.30

Several commenters encouraged the agencies not to include in total leverage exposure the

notional amount of all off-balance sheet assets, particularly for undrawn commitments.

Commenters stated that using the notional value is inaccurate, particularly for trade finance and

committed credit lines. Commenters encouraged the agencies to use the more granular

standardized approach credit conversion factors (CCF) in the 2013 revised capital rule. 30 One commenter also noted that retaining the proposal to include U.S. Treasury debt securities in total leverage exposure could present certain national security concerns.

31

With respect to the commenters’ request for more risk-sensitivity in the supplementary

leverage ratio calculation, the agencies believe that excluding categories of assets from the

denominator of the supplementary leverage ratio is generally inconsistent with the intended role

of this ratio as an overall limitation on leverage that does not differentiate across asset types.

Accordingly, the agencies have decided not to exempt any categories of balance sheet assets

from the denominator of the supplementary leverage ratio in the final rule. Thus, for example,

cash, U.S. Treasuries, and deposits at the Federal Reserve are included in the denominator of the

supplementary leverage ratio, as has been the case in the agencies’ generally applicable leverage

ratio. The agencies recognize the low risk of these assets under the agencies’ risk-based capital

rules, which complement the minimum supplementary leverage ratio requirement and the

enhanced supplementary leverage ratio standards, as discussed above. Excluding specific

categories of assets from the supplementary leverage ratio denominator would in effect allow

banking organizations to finance these assets exclusively with debt, potentially resulting in a

significant increase in a banking organizations’ ability to deploy financial leverage.

With regard to the comments criticizing the use of the notional amounts of off-balance

sheet commitments for purposes of the supplementary leverage ratio, the agencies are seeking

comment on proposed changes to the denominator in the 2014 NPR that would include the use of

standardized approach CCFs for most off-balance sheet commitments.

G. Proposed Basel III Leverage Ratio Revisions

A number of commenters were concerned about the relationship between the enhanced

supplementary leverage ratio standards and the revisions to the Basel III leverage ratio

framework proposed by the BCBS consultative paper, which proposed a leverage ratio exposure

measure that would result in greater reported exposure than the total leverage exposure as

32

defined in the 2013 revised capital rule.

A number of commenters were concerned that covered organizations would be placed at

a competitive disadvantage relative to foreign competitors if the enhanced supplementary

leverage ratio standards in the U.S. are set at a higher level than the Basel III leverage ratio.

Some commenters also expressed concern that the proposed BCBS revisions to the denominator

would be inappropriately restrictive and might be incorporated into the U.S. supplementary

leverage ratio. However, another commenter argued that a stronger leverage ratio standard

would enhance the competitive position of U.S. banking organizations by improving the relative

stability and financial strength of the U.S. banking system.

One commenter included a study of the impact of the revisions proposed in the BCBS’s

consultative paper, and, where relevant, the U.S. enhanced supplementary leverage ratio

standards, on the U.S. banking industry, products offered by U.S. banks, and U.S. markets. The

study concludes that, on average, U.S. advanced approaches banking organizations (including

U.S. G-SIBs) exceed the 3 percent supplementary leverage ratio threshold based both on the ratio

as formulated in the Basel III leverage ratio framework and after giving effect to the BCBS

proposed revisions, but when measured against the proposed enhanced supplementary leverage

ratio standards, U.S. advanced approaches banking organizations would have substantial tier 1

capital shortfalls. Specifically, the study suggests that if the revisions proposed in the

consultative paper and the proposed enhanced supplementary leverage ratio standards were both

implemented, the U.S. advanced approaches banking organizations would need $202 billion in

additional tier 1 capital or a reduction in exposures of $3.7 trillion to meet those standards, and to

meet the proposed enhanced supplementary leverage ratio standards without giving effect to the

BCBS consultative paper changes, these banking organizations would need to raise $69 billion in

33

additional capital or reduce exposures by $1.2 trillion. The study suggests that if the agencies

adopted the Basel proposed total leverage exposure as contemplated in the consultative paper in

combination with the proposed enhanced supplementary leverage ratio standards, the leverage

ratio would become the binding constraint for banking organizations holding 67 percent of U.S.

G-SIB assets.

One commenter, on the other hand, encouraged the agencies to revise the denominator of

the supplementary leverage ratio in accordance with the BCBS’s consultative paper. This

commenter further encouraged the agencies to restrict derivatives netting permitted under the

BCBS consultative paper and to substantially increase the standardized measurement of the

potential future exposure for derivative transactions. Similarly, another commenter asked the

agencies to consider the use of International Financial Reporting Standards (IFRS) for purposes

of measuring off-balance sheet derivatives exposures.

Neither the 2013 NPR nor the final rule includes the changes to total leverage exposure

described in the BCBS consultative paper. Therefore, the agencies’ supplementary leverage ratio

is consistent with the international leverage ratio established by the BCBS in 2010. The

agencies’ analysis of the impact of this final rule is summarized in the next section of this

preamble.

As discussed above, in January 2014 the BCBS adopted certain aspects of the proposals

outlined in the BCBS consultative paper as well as other changes to the denominator. The

changes to the denominator included, among other items, revising CCFs for certain off-balance

sheet exposures, incorporating the notional amount of sold credit protection (that is, credit

derivatives sold by a banking organization acting as a credit protection provider) in total leverage

exposure, and modifying the measure of exposure for derivatives and repo-style transactions,

34

including changes to the criteria for recognizing netting for repo-style transactions and cash

collateral for derivatives. The agencies believe that the changes introduced by the BCBS

strengthen the Basel III leverage ratio in important ways. In the 2014 NPR, published elsewhere

in today’s Federal Register, the agencies are proposing revisions to the supplementary leverage

ratio that are generally consistent with the BCBS 2014 revisions. The agencies believe that the

proposed revisions to the definition of total leverage exposure published in the 2014 NPR are

responsive to a number of concerns that commenters expressed about the relationship between

the BCBS process and the supplementary leverage ratio. In this regard, the agencies will

carefully review all comments received on these aspects of the definition of total leverage

exposure in the 2014 NPR.

H. Impact Analysis

Commenters suggested that, in addition to waiting for the BCBS to finalize the

denominator of the Basel leverage ratio, the agencies should conduct a quantitative impact study

to assess the cumulative impact of bank capital and other financial reform regulations on the

ability of U.S. banking organizations to provide financial services to consumers and businesses.

In the 2013 NPR, the agencies cited data from the Board’s Comprehensive Capital

Analysis and Review (CCAR) process in which all of the agencies participate. This information

reflects banking organizations’ own projections of their supplementary leverage ratios under the

supervisory baseline scenario, including institutions’ own assumptions about earnings retention

and other strategic actions.

As noted in the 2013 NPR, in the 2013 CCAR, all 8 covered BHCs met the 3 percent

supplementary leverage ratio as of third quarter 2012, and almost all projected that their

supplementary leverage ratios would exceed 5 percent at year-end 2017. If the enhanced

35

supplementary leverage ratio standards had been in effect as of third quarter 2012, covered

BHCs under the 2013 NPR that did not exceed a minimum supplementary leverage ratio

requirement of 3 percent plus a 2 percent leverage buffer would have needed to increase their tier

1 capital by about $63 billion to meet that ratio.

Because CCAR is focused on the consolidated capital of BHCs, BHCs did not project

future Basel III leverage ratios for their IDIs. To estimate the impact of the 2013 NPR on the

lead subsidiary IDIs of covered BHCs, the agencies assumed that an IDI has the same ratio of

total leverage exposure to total assets as its BHC. Using this assumption and CCAR 2013

projections, all 8 lead subsidiary IDIs of covered BHCs were estimated to meet the 3 percent

supplementary leverage ratio as of third quarter 2012. If the enhanced supplementary leverage

ratio standards had been in effect as of third quarter 2012, the lead subsidiary IDIs of covered

BHCs that did not meet a 6 percent supplementary leverage ratio would have needed to increase

their tier 1 capital by about $89 billion to meet that ratio.

In finalizing the rule, the agencies updated their supervisory estimates of the amount of

tier 1 capital that would be required for covered BHCs and their lead subsidiary IDIs to meet the

enhanced supplementary leverage ratio standards. Using updated CCAR estimates, all 8 covered

BHCs meet the 3 percent supplementary leverage ratio as of fourth quarter 2013. If the

enhanced supplementary leverage ratio standards had been in effect as of fourth quarter 2013,

CCAR data suggests that covered BHCs that would not have met a 5 percent supplementary

leverage ratio would have needed to increase their tier 1 capital by about $22 billion to meet that

ratio.

Assuming that an IDI has the same ratio of total leverage exposure to total assets as its

BHC to estimate the impact at the IDI level, the updated CCAR data indicates that all 8 lead

36

subsidiary IDIs of covered BHCs meet the 3 percent supplementary leverage ratio as of fourth

quarter 2013. If the enhanced supplementary leverage ratio standards had been in effect as of

fourth quarter 2013, the updated CCAR data suggests that the lead subsidiary IDIs of covered

BHCs that did not meet a 6 percent ratio would have needed to increase their tier 1 capital by

about $38 billion to meet that ratio. The agencies believe that the affected covered BHCs and

their subsidiary IDIs would be able to effectively manage their capital structures to meet the

enhanced supplementary leverage ratio standards in the final rule by January 1, 2018. The

agencies believe that this transition period should help to reduce any short-term consequences

and allow covered organizations to adjust smoothly to the new supplementary leverage ratio

standards.

I. Advanced Approaches Framework

The agencies sought comment on whether in light of the proposed enhanced

supplementary leverage ratio standards and ongoing standardized risk-based capital floors, the

agencies should consider, in some future regulatory action, simplifying or eliminating portions of

the advanced approaches rule if they are unnecessary or duplicative. One commenter stated that

mandatory application of the advanced approaches rule is based on an outdated size-based

threshold, and that the agencies should review the thresholds for mandatory application of the

advanced approaches risk-based capital rules and consider whether, in light of recently

implemented reforms to the regulatory capital framework, the criteria remain appropriate or

whether they should be refined given the purpose of those rules. Another commenter

recommended delaying consideration of the proposed enhanced supplementary leverage ratio

standards pending the review and completion of regulatory initiatives based on the BCBS’s

discussion paper entitled, The regulatory framework: balancing risk sensitivity, simplicity and

37

comparability.31

The agencies are not proposing any changes to the advanced approaches rule in

connection with the final rule. As with any aspect of the regulatory capital framework, the

agencies will continue to evaluate the appropriateness of the requirements of the advanced

approaches rule in light of this final rule and the ongoing evolution of the U.S. financial

regulatory framework.

III. Description of the Final Rule

For the reasons discussed above, and consistent with the transition provisions set forth in

subpart G of the 2013 revised capital rule, the agencies have decided to adopt the 2 percent

leverage buffer for covered BHCs and the 6 percent well-capitalized threshold for subsidiary

IDIs of covered BHCs effective on January 1, 2018. The final rule implements the provisions in

the 2013 NPR as proposed. Accordingly, the final rule applies to any U.S. top-tier BHC with

more than $700 billion in total consolidated assets or more than $10 trillion in assets under

custody and any advanced approaches IDI subsidiary of such BHCs.

As further discussed above, the agencies are proposing elsewhere in the Federal Register

changes to the calculation of the supplementary leverage ratio that would amend the 2013

revised capital rule and change the basis for calculating the supplementary leverage ratio.

Under the final rule, a covered BHC that maintains a leverage buffer greater than

2 percent of its total leverage exposure is not subject to the rule’s limitations on its distributions

and discretionary bonus payments.32 If the covered BHC maintains a leverage buffer of 2

percent or less, it is subject to increasingly stricter limitations on such payouts. An IDI that is a

31 Available at http://www.bis.org/publ/bcbs258.pdf. 32 See section11(a)(4) of the 2013 revised capital rule.

38

subsidiary of a covered BHC is required to satisfy a 6 percent supplementary leverage ratio to be

considered well capitalized for PCA purposes. The leverage ratio PCA thresholds under the

2013 revised capital rule and this final rule are shown in Table 1.

Table 1: Leverage Ratio PCA levels

PCA category Generally applicable

leverage ratio (percent)

Supplementary Leverage Ratio for

advanced approaches banking

organizations (percent)

Supplementary Leverage Ratio for subsidiary IDIs of

covered BHCs (percent)

Well Capitalized ≥ 5 Not applicable ≥ 6 Adequately Capitalized ≥ 4 ≥ 3 ≥ 3

Undercapitalized < 4 < 3 < 3 Significantly

Undercapitalized < 3 Not applicable Not applicable

Critically Undercapitalized

Tangible equity (defined as tier 1

capital plus non-tier 1 perpetual preferred

stock) to Total Assets ≤ 2

Not applicable Not applicable

Note: The supplementary leverage ratio includes many off-balance sheet exposures in its denominator; the generally applicable leverage ratio does not.

All advanced approaches banking organizations must calculate and begin reporting their

supplementary leverage ratios beginning in the first quarter of 2015. However, the enhanced

supplementary leverage ratio standards for covered organizations set forth in the final rule do not

become effective until January 1, 2018.

IV. REGULATORY ANALYSIS

A. Paperwork Reduction Act (PRA)

There is no new collection of information pursuant to the PRA (44 U.S.C. 3501 et seq.)

contained in this final rule. The agencies did not receive any comment on their PRA analysis.

39

B. Regulatory Flexibility Act Analysis

OCC

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA) requires an agency, in

connection with a final rule, to prepare a Final Regulatory Flexibility Act analysis describing the

impact of the rule on small entities (defined by the Small Business Administration for purposes

of the RFA to include banking entities with total assets of $500 million or less) or to certify that

the rule will not have a significant economic impact on a substantial number of small entities.

Using the SBA’s size standards, as of December 31, 2013, the OCC supervised 1,195

small entities.33

As described in the Supplementary Information section of the preamble, the final rule

strengthens the supplementary leverage ratio standards for covered BHCs and their IDI

subsidiaries. Because the final rule applies only to covered BHCs and their IDI subsidiaries, it

does not impact any OCC-supervised small entities. Therefore, the OCC certifies that the final

rule will not have a significant economic impact on a substantial number of OCC-supervised

small entities.

Board

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA) requires an agency to provide

a final regulatory flexibility analysis with a final rule or to certify that the rule will not have a

significant economic impact on a substantial number of small entities (defined for purposes of

the RFA beginning on July 22, 2013, to include banks with assets less than or equal to $500 33 The OCC calculated the number of small entities using the SBA’s size thresholds for commercial banks and savings institutions, and trust companies, which are $500 million and $35.5 million, respectively. 78 FR 37409 (June 20, 2013). Consistent with the General Principles of Affiliation 13 CFR §121.103(a), the OCC counted the assets of affiliated financial institutions when determining whether to classify a national bank or Federal savings association as a small entity. The OCC used December 31, 2013, to determine size because a “financial institution's assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.” See footnote 8 of the U.S. Small Business Administration’s Table of Size Standards.

40

million)34 and publish its analysis or a summary, or its certification and a short, explanatory

statement, in the Federal Register along with the final rule.

The Board is providing a final regulatory flexibility analysis with respect to this final

rule. As discussed above, this final rule is designed to enhance the safety and soundness of U.S.

top-tier bank holding companies with at least $700 billion in consolidated assets or at least $10

trillion in assets under custody (covered BHCs), and the insured depository institution

subsidiaries of covered BHCs. The Board received no public comments on the proposed rule

from members of the general public or from the Chief Counsel for Advocacy of the Small

Business Administration. Thus, no issues were raised in public comments relating to the Board’s

initial regulatory flexibility act analysis and no changes are being made in response to such

comments.

Under regulations issued by the Small Business Administration, a small entity includes a

depository institution or bank holding company with total assets of $500 million or less (a small

banking organization). As of December 31, 2013, there were 627 small state member banks. As

of December 31, 2013, there were approximately 3,676 small bank holding companies. No small

top-tier bank holding company would meet the threshold provided in the final rule, so there

would be no additional projected compliance requirements imposed on small bank holding

companies. One covered bank holding company has one small state member bank subsidiary,

which would be covered by the final rule. The Board expects that any small banking

organization covered by the final rule would rely on its parent banking organization for

compliance and would not bear additional costs.

34 See 13 CFR 121.201. Effective July 22, 2013, the Small Business Administration revised the size standards for banking organizations to $500 million in assets from $175 million in assets. 78 FR 37409 (June 20, 2013).

41

The Board believes that the final rule will not have a significant economic impact on

small banking organizations supervised by the Board and therefore believes that there are no

significant alternatives to the final rule that would reduce the economic impact on small banking

organizations supervised by the Board.

FDIC

The RFA requires an agency to provide an FRFA with a final rule or to certify that the

rule will not have a significant economic impact on a substantial number of small entities

(defined for purposes of the RFA to include banking entities with total assets of $500 million or

less).35

As described in sections I and III of this preamble, the final rule strengthens the

supplementary leverage ratio standards for covered BHCs their advanced approaches IDI

subsidiaries. As of December 31, 2013, 1 (out of 3,394) small state nonmember bank and no

(out of 303) small state savings associations were advanced approaches IDI subsidiaries of a

covered BHC. Therefore, the FDIC does not believe that the final rule will result in a significant

economic impact on a substantial number of small entities under its supervisory jurisdiction.

The FDIC certifies that the final rule does not have a significant economic impact on a

substantial number of small FDIC-supervised institutions.

C. OCC Unfunded Mandates Reform Act of 1995 Determination

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 104–4

(Unfunded Mandates Reform Act) provides that an agency that is subject to the Unfunded

Mandates Act must prepare a budgetary impact statement before promulgating a rule that

35 Effective July 22, 2013, the SBA revised the size standards for banking organizations to $500 million in assets from $175 million in assets. 78 FR 37409 (June 20, 2013).

42

includes a Federal mandate that may result in expenditure by State, local, and tribal

governments, in the aggregate, or by the private sector, of $100 million (adjusted for inflation) or

more in any one year. The current inflation-adjusted expenditure threshold is $141 million. If a

budgetary impact statement is required, section 205 of the UMRA also requires an agency to

identify and consider a reasonable number of regulatory alternatives before promulgating a rule.

The OCC has determined this proposed rule is likely to result in the expenditure by the private

sector of $141 million or more. The OCC has prepared a budgetary impact analysis and

identified and considered alternative approaches. When the final rule is published in the Federal

Register, the full text of the OCC’s analyses will available at: http:// www.regulations.gov,

Docket ID OCC–2013–0008.

D. Plain Language

Section 722 of the Gramm-Leach-Bliley Act requires the Federal banking agencies to use

plain language in all proposed and final rules published after January 1, 2000. The agencies have

sought to present the final rule in a simple and straightforward manner. The agencies did not

receive any comment on their use of plain language.

End of the Common Preamble

List of Subjects

12 CFR Part 3

Administrative practice and procedure, Capital, National banks, Reporting and

recordkeeping requirements, Risk.

12 CFR Part 5

43

Administrative practice and procedure, National banks, Reporting and recordkeeping

requirements, Securities.

12 CFR Part 6

National banks.

12 CFR Part 165

Administrative practice and procedure, Savings associations.

12 CFR Part 167

Capital, Reporting and recordkeeping requirements, Risk, Savings associations.

12 CFR Part 208

Confidential business information, Crime, Currency, Federal Reserve System,

Mortgages, Reporting and recordkeeping requirements, Securities.

12 CFR Part 217

Administrative practice and procedure, Banks, Banking, Capital, Federal Reserve

System, Holding companies, Reporting and recordkeeping requirements, Securities.

12 CFR Part 324

Administrative practice and procedure, Banks, banking, Capital Adequacy, Reporting and

recordkeeping requirements, Savings associations, State non-member banks.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

44

For the reasons set forth in the common preamble and under the authority of 12 U.S.C.

93a, 1831o, and 5412(b)(2)(B), the Office of the Comptroller of the Currency amends part 6 of

chapter I of title 12, Code of Federal Regulations as follows:

PART 6—PROMPT CORRECTIVE ACTION

1. Revise the authority of part 6 to read as follows:

Authority: 12 U.S.C. 93a, 1831o, 5412(b)(2)(B).

2. Revise § 6.4 to read as follows:

§ 6.4 Capital measures and capital category definition.

* * * * *

(c) Capital categories applicable on and after January 1, 2015. On January 1, 2015, and

thereafter, for purposes of the provisions of section 38 and this part, a national bank or Federal

savings association shall be deemed to be:

(1) Well capitalized if:

* * * * *

(iv) Leverage Measure:

(A) The national bank or Federal savings association has a leverage ratio of 5.0 percent or

greater; and

(B) With respect to a national bank or Federal savings association that is a subsidiary of a

U.S. top-tier bank holding company that has more than $700 billion in total assets as reported on

the company’s most recent Consolidated Financial Statement for Bank Holding Companies (FR

Y–9C) or more than $10 trillion in assets under custody as reported on the company’s most

recent Banking Organization Systemic Risk Report (Y-15), on January 1, 2018 and thereafter,

45

the national bank or Federal savings association has a supplementary leverage ratio of

6.0 percent or greater; and

* * * * *

Board of Governors of the Federal Reserve System

12 CFR CHAPTER II

Authority and Issuance

For the reasons set forth in the common preamble, chapter II of title 12 of the Code of

Federal Regulations is revised as follows:

PART 208 – MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL

RESERVE SYSTEM (REGULATION H)

3. The authority citation for part 208 is revised to read as follows:

Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 371d, 461, 481-486,

601, 611, 1814, 1816, 1818, 1820(d)(9), 1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1,

1831w, 1831x, 1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, 3905-3909, and 5371; 15

U.S.C. 78b, 78I(b), 78l(i), 780-4(c)(5), 78q, 78q-1, and 78w, 1681s, 1681w, 6801, and 6805; 31

U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 4128.

4. In § 208.41, a definition of “covered BHC” to be added to read as follows: § 208.41 Definitions for purposes of this subpart.

* * * * *

Covered BHC means a covered BHC as defined in § 217.2 of Regulation Q (12 CFR 217.2).

* * * * *

46

5. Revise § 208.43 to read as follows:

§ 208.43 Capital measures and capital category definitions.

(a) Capital measures.

* * * * * (2) Capital measures applicable after January 1, 2015. On January 1,

2015, and thereafter, for purposes of section 38 and this subpart, the relevant capital measures

are:

* * * * * (iv) Leverage Measure:

* * * * * (C) With respect to any bank that is a subsidiary (as defined in § 217.2 of

Regulation Q (12 CFR 217.2)) of a covered BHC, on January 1, 2018, and thereafter, the

supplementary leverage ratio.

* * * * * (c) Capital categories applicable to advanced approaches banks and to all

member banks on and after January 1, 2015. On January 1, 2015, and thereafter, for purposes of

section 38 and this subpart, a member bank is deemed to be:

(1) “Well capitalized” if:

* * * * * (iv) Leverage Measure:

(A) The bank has a leverage ratio of 5.0 percent or greater; and

(B) Beginning on January 1, 2018, with respect to any bank that is a subsidiary of a

covered BHC under the definition of “subsidiary” in section 2 of part 217 (12 CFR 217.2), the

bank has a supplementary leverage ratio of 6.0 percent or greater; and

* * * * *6. Amend part 217 as follows:

PART 217 – CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS

AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION

Q)

47

Subpart A – General Provisions

Sec.

271.1 Purpose, applicability, reservations of authority, and timing.

271.2 Definitions.

Subpart B – Capital Ratio Requirements and Buffers

217.11 Capital conservation buffer and countercyclical capital buffer amount.

Authority: 12 U.S.C. 248(a), 321–338a, 481-486, 1462a, 1467a, 1818, 1828, 1831n,

1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, 3904, 3906-3909, 4808, 5365, 5368, 5371.

Subpart A – General Provisions

§217.1 Purpose, applicability, reservations of authority, and timing.

* * * * *

(f) Timing.

* * * * *

(4) Beginning January 1, 2018, a covered BHC as defined in §217.2 is subject to the lower

of the maximum payout amount as determined under §217.11(a)(2)(iii) and the maximum

leverage payout amount as determined under §217.11(a)(2)(vi).

§ 217.2 Definitions.

Covered BHC means a U.S. top-tier bank holding company that has more than $700

billion in total assets as reported on the company’s most recent Consolidated Financial

Statements for Holding Companies (FR Y–9C) or more than $10 trillion in assets under custody

as reported on the company’s most recent Banking Organization Systemic Risk Report (FR Y-

15).

48

Subpart B – Capital Ratio Requirements and Buffers

§217.11 Capital conservation buffer and countercyclical capital buffer amount.

(a) Capital conservation buffer.

* * * * *

(2) Definitions. * * * * *

(v) Maximum leverage payout ratio. The maximum leverage payout ratio is the

percentage of eligible retained income that a covered BHC can pay out in the form of

distributions and discretionary bonus payments during the current calendar quarter. The

maximum leverage payout ratio is based on the covered BHC’s leverage buffer, calculated as of

the last day of the previous calendar quarter, as set forth in Table 2 of this section.

(vi) Maximum leverage payout amount. A covered BHC’s maximum leverage payout

amount for the current calendar quarter is equal to the covered BHC’s eligible retained income,

multiplied by the applicable maximum leverage payout ratio, as set forth in Table 2 of this

section.

* * * * *

(4) Limits on distributions and discretionary bonus payments.

(i) A Board-regulated institution shall not make distributions or discretionary bonus

payments or create an obligation to make such distributions or payments during the current

calendar quarter that, in the aggregate, exceed the maximum payout amount or, as applicable, the

maximum leverage payout amount.(ii) A Board-regulated institution that has a capital

conservation buffer that is greater than 2.5 percent plus 100 percent of its applicable

countercyclical capital buffer, in accordance with paragraph (b) of this section, and, if applicable,

that has a leverage buffer that is greater than 2.0 percent, in accordance with paragraph (c) of this

49

section, is not subject to a maximum payout amount or maximum leverage payout amount under

this section.

(iii) Negative eligible retained income. Except as provided in paragraph (a)(4)(iv) of this

section, a Board-regulated institution may not make distributions or discretionary bonus

payments during the current calendar quarter if the Board-regulated institution’s:

(A) Eligible retained income is negative; and

(B) Capital conservation buffer was less than 2.5 percent, or, if applicable, leverage

buffer was less than 2.0 percent, as of the end of the previous calendar quarter.

* * * * *

(c) Leverage buffer. (1) General. A covered BHC is subject to the lower of the

maximum payout amount as determined under paragraph (a)(2)(iii) of this section and the

maximum leverage payout amount as determined under paragraph (a)(2)(vi) of this section.

(2) Composition of the leverage buffer. The leverage buffer is composed solely of tier 1

capital.

(3) Calculation of the leverage buffer. (i) A covered BHC’s leverage buffer is equal to

the covered BHC’s supplementary leverage ratio minus 3 percent, calculated as of the last day of

the previous calendar quarter based on the covered BHC’s most recent Consolidated Financial

Statement for Bank Holding Companies (FR Y–9C).

(ii) Notwithstanding paragraph (c)(3)(i) of this section, if the covered BHC’s

supplementary leverage ratio is less than or equal to 3 percent, the covered BHC’s leverage

buffer is zero.

TABLE 2 to §217.11 – CALCULATION OF MAXIMUM LEVERAGE PAYOUT AMOUNT

Leverage buffer Maximum leverage payout ratio

50

(as a percentage of eligible retained

income)

Greater than 2.0 percent No payout ratio limitation applies

Less than or equal to 2.0 percent, and greater than

1.5 percent 60 percent

Less than or equal to 1.5 percent, and greater than

1.0 percent 40 percent

Less than or equal to 1.0 percent, and greater than

0.5 percent 20 percent

Less than or equal to 0.5 percent 0 percent

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

For the reasons stated in the preamble, the Federal Deposit Insurance Corporation is

revising part 324 of chapter III of Title 12, Code of Federal Regulations as follows:

PART 324—CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

7. The authority section for part 324 continues to read as follows:

Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth),

1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub.

L. 102-233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 2236,

2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102-

51

242, 105 Stat. 2236, 2386, as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C.

1828 note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).

8. Revise § 324.403(b)(1)(v) to read as follows:

§ 324.403 Capital measures and capital category definitions

* * * * *

(b) Capital categories. For purposes of section 38 of the FDI Act and this subpart, an

FDIC-supervised institution shall be deemed to be:

(1) “Well capitalized” if it:

* * * * *

(v) Beginning on January 1, 2018 and thereafter, an FDIC-supervised institution that is a

subsidiary of a covered BHC will be deemed to be well capitalized if the FDIC-supervised

institution satisfies paragraphs (b)(1)(i)-(iv) of this paragraph and has a supplementary leverage

ratio of 6.0 percent or greater. For purposes of this paragraph, a covered BHC means a U.S. top-

tier bank holding company with more than $700 billion in total assets as reported on the

company’s most recent Consolidated Financial Statement for Bank Holding Companies (FR Y–

9C) or more than $10 trillion in assets under custody as reported on the company’s most recent

Banking Organization Systemic Risk Report (FR Y-15); and

* * * * *

52

[THIS SIGNATURE PAGE PERTAINS TO THE FINAL RULE TITLED, “ENHANCED SUPPLEMENTARY LEVERAGE RATIO STANDARDS FOR CERTAIN BANK HOLDING COMPANIES AND THEIR SUBSIDIARY INSURED DEPOSITORY INSTITUTIONS”]

Dated: April____, 2014

Thomas J. Curry, Comptroller of the Currency.

53

[THIS SIGNATURE PAGE PERTAINS TO THE FINAL RULE TITLED, “ENHANCED SUPPLEMENTARY LEVERAGE RATIO STANDARDS FOR CERTAIN BANK HOLDING COMPANIES AND THEIR SUBSIDIARY INSURED DEPOSITORY INSTITUTIONS”] By order of the Board of Governors of the Federal Reserve System, April ___, 2014 Robert deV. Frierson Secretary of the Board.

54

[THIS SIGNATURE PAGE PERTAINS TO THE FINAL RULE TITLED, “ENHANCED SUPPLEMENTARY LEVERAGE RATIO STANDARDS FOR CERTAIN BANK HOLDING COMPANIES AND THEIR SUBSIDIARY INSURED DEPOSITORY INSTITUTIONS”]

Dated at Washington, D.C., this [] day of April __, 2014.

By order of the Board of Directors.

Federal Deposit Insurance Corporation Robert E. Feldman, Executive Secretary.